Category: Consumer

As more and more younger investors are embracing robos and ETFs vs. actively managed portfolios, the dollars being invested are shifting. As we look ahead to where the assets are going, it’s impossible not to wonder what this means for the economics of the investment firms, asset managers and brokers. ETFs are growing and they’re also a lower cost investment vehicle. Schwab’s annual report is a great example of how assets are flowing into lower cost investment options (ETF growth is booming – up 19%) and the number of client accounts continues to grow (more on that later). But while it’s always good to see growth, and great to know people are investing (!), does this mean there’s a reset coming as it relates to the fees generated (or not) by investment products?

For large incumbents there’s a cushion, because they’re more diversified as it relates to product offerings, and in turn, revenue streams. But with the shift to a lower cost product like ETFs, and the combination of Millennials pouring money in and Boomers pulling money out, there’s less investing in traditional mutual funds, creating a shift in how incumbents need to think about their revenue streams. And while these companies are seeing gains, with Schwab’s stock price up over a 10 year period, what does this mean for their long term offerings and strategy?

And while Gen X and Boomers might be investing in ETFs, the majority of them and their dollars are invested in mutual funds and/actively managed portfolios. These represent greater asset volumes and are also higher cost products.

Will there be a pendulum shift?

It does appear that way. As older generations move into retirement and withdraw funds, the AUM in traditional mutual funds, actively managed portfolios and among advisory solutions will decline. But, because younger generations are continuing to earn and earn more, it’s likely they’ll continue to pump more into ETFs. The set-it-and-forget-it type investing is ripe for this new audience who wants to dip their toes in the water, including the introduction and usage of target funds as options in 401Ks and IRAs. In fact, according to Statistica as of 2018, passive investing is growing exponentially in the US:

AUM in the Robo-Advisors segment currently amounts to $283 Billion

AUM are expected to show an annual growth rate (CAGR 2018-2022) of 22.8% resulting in the total amount of $643 Billion by 2022

In the Robo-Advisors segment, the number of users is expected to amount to 12 Million by 2022

The average AUM per user in the Robo-Advisors segment amounts to $43,039

Bringing it back to Schwab, their active brokerage accounts are up 6%, their total client assets are up 21% and their proprietary mutual funds are up 19%.

However, total assets among their ETFs more than doubled from 2013 to 2017, an astounding $204 vs $436B. From 2016 to 2017 alone, that was a CAGR of 37% among ETFs vs. 20% for mutual funds during the same period. And only 7% when you look specifically at Schwab’s proprietary mutual funds.

Some final thoughts:

As more investors jump on the ETF & Robo bandwagon and less use full service advisory services and higher cost Mutual Funds, what happens to the fee structure of these firms as more assets move to the lower cost products?

Will there be a need to create a new model and what will that model look like?

More and more APIs are being adopted across all industries—travel (Google Maps), food/entertainment (OpenTable, Spotify), communication (What’sApp, Messenger, WeChat). Companies like Button are partnering with brands to help distribute their offerings to a large developer community and that are eager to strengthen their mobile experience via the use of APIs. APIs, to these organizations, equal opportunity, and access.

However, when looking at the Finance industry, banks and brokerages are lagging behind in API adoption. Screen-scraping—which we’ve written about numerous times—doesn’t allow for reliable data connections to banks and is a huge security risk. However, screenscrapers are widely used and via the halo effect, end users are tricked into submitting their information that results in loss of control over their own data. All of that can be alleviated with the adoption of APIs which use information in a more effective and efficient way. APIs still allow data sharing but in a way that creates a safe, seamless experience for both users and creators.

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“From the industry perspective, what’s brilliant about ETFs are they have the ability to work well under pressure. Any time we’ve seen dips or a bear market, we’ve seen ETFs be a good haven because all you’re doing is going to a different side of a trade.” – Global Asset Manager with >$1T AUM

The appeal of ETFs to investors is diversification. The ETF surge represents a shifting investment ecosystem away from active, toward passive. According to a Charles Schwab 2017 ETF Investor Survey, the percentage of ETF investors by demographic is as follows: 56% of Millennials, 44% of Gen X and 30% of Boomers. In fact, an astounding 96% of millennials see ETFs as a necessary part of their investment strategy, perhaps because they have less money available to invest.

Our current financial system is geared towards a much lower average life expectancy. Yet, as people live longer, their portfolios need more durability. So what is the liquidity of ETFs and the ability for ETF companies to unwind when, for example, a boomer needs to start drawing down? Or, what happens during a crunch?

Facing Liquidity

“I’m not worried about ETF liquidity. There’s always fear of that but I don’t think there’s suddenly going to be a liquidity drought in asset classes. It’s really at the very back of our heads.” – Large Pension Fund

Cash inflows to an ETF that has large holdings of a specific company could misprice a company blindly. “In the largest products, where most of the money sits, about 90% of trading that occurs is in the secondary market, according to Vanguard’s research. That means ETF investors are passing investments between themselves, and not having to transact with fund managers.”

Another reason for concern, a July report from Cirrus Research cites that, “companies with higher ETF exposure have steadily underperformed their counterparts since last June.” While the rise of robo advisors reflects this changing paradigm, a lack of understanding drives ETF demand and introduces risks. And it shows no signs of slowing down with 61% of millennials planning to increase their ETF positions. So while wealth managers used to be too expensive for the masses, automation is changing that and ETFs are democratizing the investment world.

ETFs played a role in the sell-off in 2015:

According to SEC, exchange-traded products experienced higher volume and volatility than standard stocks

Swings in price seemed arbitrary among otherwise similar ETFs

Many of the shares owned by investors were dealt by short sellers (unbeknownst to the investors)

As investors realize they own ‘synthetic’ ETF shares, the situation could explode

Before the Burst

Banks and trading firms happily sell and trade ETFs when the market is calm. When they can buy at a discount and sell at a premium, these firms will continue to offer ETFs in large quantity. But when that is no longer a probability or possibility, the suppliers of ETFs will most likely disappear, essentially undoing the entire system. But there are ways to fix the bubble.

‘Physical’ ETFs have much lower risk because they are actually hard backed by the underlying security. Diversifying with equities that aren’t usually tracked by ETFs can help avoid market cap bias.

How Close is the Burst?

Millennials are pouring their investment dollars into ETFs. They’re also the target of many of the robo advisors and FinTech’s helping investors begin to grow their wealth. Many of these robos and “set-it-and-forget-it” FinTechs are leveraging ETFs in their portfolios due to the lower price point, dollar-based investing, etc.

That said, could the potential burst or liquidity crunch be stalled due to the influx of Millennials investing in ETFs? Or is that a temporary distraction? Will the robos and FInTechs potentially suffer the same fate?

Case in point: look what happened to some of the robos that got squeezed during Brexit as people demanded access to their funds. Will this instance be a case of only time will tell, or are these brakes on their potential roller coaster?

We’ve done a lot of talking lately about open data and why it’s so important for consumers and businesses. This ranges from allowing for increased innovation to the importance of APIs. Let’s dissect what this announcement doesn’t say:

The sale of this data is one of the big areas of interest among hedge funds. Many are interested in non-traditional data sets, and consumer portfolios/activity is one of those data sets that’s viewed as interesting data to hedge funds. With all the money available for data, it’s hard to believe they are going to leave those chips on the table and walk away.

Essentially, there’s not much here. There’s no clear benefit to the investor and the protection of their data and there’s no clear benefit in terms of security.

APIs are the big missing piece in all of this and what’s really needed above and beyond these “made up” frameworks. APIs give everyone more control, allowing FIs to benefit the users and truly keep their information secure and protected.

In Europe, the Europeans believe they own their own data, but that’s not true in the US. This is the mind shift that needs to happen to give people more control of their data and in turn, their privacy. No acronyms needed.

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FIs spend most of their marketing dollars on account acquisition. In fact, in 2017, the US financial services industry will have spent $10.1 billion on digital advertising, a 13.1% gain from 2016, according to eMarketer.But for all this spend there’s been almost no innovation in this space. And that lack of innovation is losing customers and costing FIs millions. It’s time that FI’s begin to ask:

Is there a better model?

How can the account opening process be improved upon for an easier flow for the end user?

In a previous post, TradeIt conducted time trials to open a new brokerage account on mobile. Completion of those applications ranged from 6 to a staggering 12 minutes. So what were the pain points and causes of abandonment?

Too complex

Too many steps

Took too long

Required information not readily available

The biggest challenge in a mobile age is that none of the account opening processes are “native to iOS” (or Android) and all require users to go to a responsive web application that’s driven from the 20-year old Affiliate link model that was designed for desktop. So, with each additional minute and extra field to complete, or with clunky mobile interfaces, the number of completed applications falls significantly. There goes your sales funnel…and your profits.

At the Benzinga Global FinTech Awards last week, the big brokers spoke about the need for innovation. TD Ameritrade cited:

40% of their trading is happening on mobile

They are doing 250,000 trades/day

The brokers on the panel—which included TD Ameritrade, Schwab, Interactive Brokers and TradeStation—agreed that constant innovation was a necessity in an age when retail brokers interfaces are being compared to Amazon and Google for being clean, easy and intuitive. As we highlighted in a post last year, 72% of millennials would rather bank with Google, Facebook or Amazon than their existing financial institution. The mobile experience is key to this and easy interfaces are what will get them to visit and stick around.

Quick and Easy

What Robinhood, Acorns, and Stash get right with their native/mobile-enabled tools is to allow users to open an account in under 5 minutes. Why? Because those tools were built from the ground up with mobile—and the end user—in mind. They know what’s important when looking at customer acquisition and creating that experience:

Hone: Get the message right

Streamline the process: avoid pitfalls that will cause potential clients to abandon the flow

Focus: Only include the must-have know-your-customer components

Make it native: If you do one thing and one thing only, make it native

We’re going to talk about screen-scraping again. Because we think it’s so important to be aware of what this means for both consumers and FI’s. You can get more background on the process of screen-scraping and what it means for the future of banking as well as the importance of API’s and innovation in our previous posts here, here and here.

One of the ways screen-scrapers are getting access to customer data is through a halo effect.

Screen-scrapers are using logos to build trust and credibility and then turning around and selling the data they’ve so trustfully obtained. By using the logos and trademarks from financial institutions, it engenders trust among the end users who associate the brand of Broker X with their money and the security that their financial institution provides. However, most FIs have not in fact granted permission or rights to the screen-scraper for them to use the logos in the first place. The trust of the logo makes an association for the end user, but this is an abuse of the institution’s mark and negatively impacts the end user and the institution itself.

The Anti Trust

Let’s be honest, most Americans aren’t enamored with big banks or financial institutions these days. However, seeing a logo of a familiar name in one of their finance apps will undoubtedly create a feeling of assurance that things are on the up and up; that their information is safe. As an end user, we’re putting our faith and trust in the visual association of the broker or bank brand on a third party site. And in this case, that trust is unfounded.

I Didn’t Sign Up for This

When this logo appears, it signals to the end user a perception of the financial institution’s endorsement of the technology, thus they willingly link their account. As we’ve argued in previous posts, the screen-scraper can then go in and grab their data — any of their data — and use it and sell it. These companies are selling that data many times over, charging their partners per linked user. But where’s the end user’s cut of the profit? And how many places are they selling it to?

Millions of Customers + 1000s of Companies = Millions of Screens Scraped and Countless Data Points Up for Grabs

An Ounce of Prevention

Luckily, all is not lost. Companies like Fidelity and Ally are ensuring their information is secure and are increasingly moving towards APIs for third parties to access their clients’ data. In fact, TradeIt’s SDK specifically helps partners integrate our technology, allowing their developers to integrate faster with simple customizations. This ensures the end user that they’re protected and gives them total control over what happens to their data. By partnering with brokers to access their APIs, TradeIt only accesses the information that the broker makes available.

Here’s how it works:

Through a broker’s API, we allow the end user to log into their brokerage account securely.

We don’t view, access or retain their log-in credentials.

After the user consents, the broker provides an encrypted token.

This token will expire, and once it does, the connection is severed.

In order to continue to view their portfolio and/or send buy or sell orders from their favorite app to their broker, the end user will need to relink their account.

Safety First

How this differs from traditional screen-scraping is simple: we don’t retain log-in credentials and continue to access and scrape the end user’s data however we see fit. Their information is not available to us. Nor should it be. Not only is this safer in the event of a data breach, it provides true trust with the end user. We only show the logos of brokers with their permission.

But, as we move into more transparency around banking, brokers are embracing this change. TradeIt has consent pages and end-user agreements that explicitly inform the investor that we’re accessing their data on their behalf. It’s more than just a logo, its an agreement between the broker and the third party. This puts the end user at the forefront, not on the backburner. Which is where they should be in the first place. After all, it’s their information.

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Whoever said ignorance is bliss obviously never unknowingly shared all their data. As we mentioned in a previous post, consumer data is being screen-scraped into the ether and this creates so many issues around control and the assumption of privacy. Once your data is scraped, it’s gone. Neither the bank or institution, nor the end user has any control.

It’s all a question of control. And APIs are the answer. They offer banks and FIs the ability to control what pieces of data and how much are grabbed by a permitted 3rd party. For example, at TradeIt—from some of our brokers’ API—we see only seven days of transaction history, while others might show 30 days. Typically no one provides more than 90 days but the depth of history varies. In addition, for things like an order blotter, some brokers only provide the current days’ orders. These smaller pieces of data ensure less is shared, though what is shared is timely and relevant.

You Get My Data and You Get My Data, Everybody Gets My Data

With screen-scraping, once you provide your ID and password to the 3rd party, their bots do the scraping and can grab anything that’s available, including your transaction history and all of your accounts under that single login. For some banks or brokers—if the broker is part of a larger financial institution that offers a diverse product set—that could be your brokerage account, retirement account, mortgage, even credit card information. Most end users likely don’t realize that once they give the screen-scraper their login, they have it, and they can and will use it until the password is changed. What’s worse most of the screen scrapers don’t have trademark rights to the logos that are on their service integrations, therefore falsely leading the consumer to believe the institution approves it. In the meantime, they’ve still grabbed that data and it’s gone…to who knows where.

Not only do APIs offer a more tailored solution where you essentially get only what you need, they create a huge potential for innovation. As we demonstrated in a previous post about your data being open for business, companies like Fidelity are already showing consumers who has access to their data and allowing them to control whether or not that’s ok with them.

In Tech We Trust

Brokers need to push themselves to invest in APIs. Ever since the invention of the FDIC, FIs have been associated with trust as it relates to consumer’s money. The theory with bank robbery was that they aren’t hurting anyone since the money is insured. Except now with screen-scraping, we are getting hurt…with our privacy…or lack thereof.

As technology evolves and allows for endless possibilities, investing in methods to engender trust and yet that also support the new ways individuals want to interact with their money, track their wealth and/or use tools for better financial decisions, is vital. Brokers and FIs need to enable that, to securely open their data with controls to prevent misuse or even breaches. This is what will create real trust with their users.

Don’t Build a Wall

Firewalls and detours aren’t the answer. It’s not about closing things off, it’s about opening them up. With the new sharing ecosystem, and with millennials having more trust and more interest in tech-driven brands, FIs need to work to remain relevant. In order to do this, you need to be an active member of the ecosystem and invest in technology that supports these behaviors.

Because, while users may be content to share some of their personal info in order to use your service now, it’s only a matter of time before they realize just how much and possibly decide it’s not worth it.

Are they really getting what they signed up for, or worse, paid for? You need to provide comfort and control to your user. If you don’t, they won’t tick that agreement box and they’ll move on to someone who can.

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As we outlined in our last post about the practice of screen scraping, in order to protect user’s data, it’s extremely important that financial institutions start moving towards APIs. With the PSD2 initiative, officially the Revised Payment Security Directive, Europe is ahead of US in terms of best financial institution security and consumer privacy practices. And if the recent Facebook/Cambridge Analytica scandal is any indication, it’s more likely that the US will see a data protection movement similar to what we’re seeing in Europe.

The question isn’t if PSD2 will be adapted in the US, but rather when? Before we try to answer this question let’s take a closer look at what PSD2 actually includes.

AISP’s provide users with aggregated information about their payment accounts in a single location, such as transaction history, account balances, direct debits etc.

PISP’s facilitate the use of payments via online banking with regards to online fund transfers, direct debits, credit cards transactions, etc. This is a game-changer when it comes to avoiding credit card fees and other transaction costs.

APIs give the financial institutions the ability to manage security and control compliance risks while at the same time giving users access, control and visibility into how their data is being used—a win/win.

There’s no timeline right now, but there are several factors that could compel this directive to happen in the US sooner than later: requirement of screen scraping companies, FinTechs and FIs to release known data breaches; a regulatory push; another Equifax breach; a consumer-driven movement; or even FIs finally having good personal finance management capabilities.

Smart companies will start preparing so the minute we have our own Open Banking, they’re ready. Or better yet, start acting like PSD2 is already here. That means:

Building and opening up APIs to allow your customers to have control

Thinking about how you can innovate once restrictions are lifted

Understanding the control APIs provide for consumers and why this is a benefit

Learning how Open Banking can save you and your customers both time and money

Creating more transparency and providing consumers with more control over who can access their data is a great thing for investors and an even better opportunity for innovation. How will you capitalize?

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Despite all the talk about big brother-like tactics, Twitter, LinkedIn, and Facebook (the Cambridge Analytica scandal, notwithstanding—but we’ll get to that in a bit) actually provide their users with a significant amount of control. Users can set their privacy and access settings for data downloads, block people, enable and disable logins, as well as receive alerts when they log in from other devices.

Taking Control

Considering how much personal consumer information they have, financial institutions have nothing comparable. In fact, they’re being screen-scraped by everyone from Mint to their own credit card marketing teams. And what’s worse, users may or may not know this. There’s no warning message or communication from the banks to their customers and if there is something, it’s probably buried in the Terms of Service of the scraper itself. Banks have no visibility into the data sharing practices or downstream uses and they have zero ability to turn-off these authentications on the banks’ site.

So while you can choose to block a high school sweetheart or de-link your Facebook account from Tinder, once you set up an auto-payment with Stash to Bank of America, BofA has no control on where the data is going, how the data is used or when the data is accessed. It’s a lose-lose for the banks and consumers.

Open Banking

APIs are the only way to address the issue. The US is already behind Europe’s PSD2 (Second Payment Services Directive) Initiative which creates Open Banking, allowing brokers to open up data via API, providing a secure and compliant means for data transfer. This change provides greater control and limits the potential misuse of screen-scraped data. That’s why the emphasis on control and compliant access is a foundational principle of TradeIt’s platform, providing connectivity to brokers and financial institutions.

After what recently came out with regards to Facebook and Cambridge Analytica, 50 million people just got a big wake-up call when it comes to how their information is being used and disseminated. It’s likely only a matter of time before Open Banking comes to our friendly shores and once it does, everyone’s going to have to play nice in the banking sandbox.

Where’s Jamie Dimon when we need him?

Before this happens, the smart US financial institutions will need to build the APIs and control centers and start educating consumers on the risks associated with scraping and gaining control of their data. In fact, some, like Fidelity, are already doing that. Their new Fidelity AccessSM product allows consumers to see which third parties the consumer has permitted to access their data. Consumers can even go one step further to disable a token that’s in place, thereby removing the connectivity and the third party’s access to the investor’s data.

Under Lock and Key

Privacy and controlled access are a mantra for Financial Institutions and people expect security, especially with the increasing numbers of hacks and data breaches. Now more than ever, providing users with control over who has access to their data is vital. Financial Institutions need to jump on the bandwagon with features that control their customers’ data. And FinTechs who partner with them need to push for APIs with secure and compliant access that allows customers to control that data. Open Banking should spur innovation, not deter it, but it needs to be done with security and compliance at the forefront. After all, they are the tenets of our industry.

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The antiquated US Financial regulatory framework continues to undermine technical innovation and hold consumers back from making the most of their money. And most of them don’t even realize it.

As far back as the late 90s, the US Regulatory frameworks for banking services in technology have yielded to the pressure of lobbyists and incumbents rather than evolving to meet changing industry dynamics, customer opportunities and increasingly global marginalization in tech innovation. While the OCC FinTech Charter is a starting point, legislators and regulators should be aggressively pushing for initiatives to enable competitive technical stacks.

Capitalism by Any Other Name

In the 1900s, companies like BMW, GE, GM, VW, Target, Goldman Sachs and Toyota were granted a creative means of undertaking banking activities by creating an Industrial Loan Corp License in select states. In some instances, the banking activities of these companies were more valuable than the bankrupt core business, as was the case with Conseco. However, there have been no hearings or approved ILCs that would receive FDIC insurance in almost a decade.

We’re watching as fintech Titans, Affirm and SoFi, are applying for Industrial Loan Licenses, whereas other fintech companies, TransferWise and Coinbase, have created “clever” workarounds by partnering with innovative community banks like Cross RiverBank of New Jersey. PayPal, the largest and oldest fintech company with over $13BN in customers’ loose change has been plagued by the FDIC question since its earliest days. Now, as they continue expanding with lending via SWIFT Financial, you wonder when PayPal will start returning money to their customers rather than taking it from them.

Outsourcing Innovation

When a communist country like China, whose PayPal equivalent Ant financial, nets users an annual return of close to 5% versus PayPal’s 0% on funds left in your account, you know something’s gotta give. But the current regulatory frameworks don’t really lend to PayPal making that change anytime soon. And if it doesn’t benefit them, why would they do it of their own volition? When you stack Ant Financial’s Yu’E Bao product—which essentially translates to “Loose Treasure”—and that has 325 Million customers with $1.14TN in assets earning about 5% annually, and you compare it to Paypal’s 179 Million customers with $13BN earning nothing, you wonder what’s broken in the US system.

It’s Time to Put Change Back in America’s Pocket

If they aren’t already, Senator Warren and the CFPB should be looking overseas to see how to put money in consumers pockets, not keep the companies that people prefer from being insured, monitored and innovating. In the end, regulations need to help support and drive innovation so we all win, whether that’s through ILCs or sharing the “loose change”.